How Tax Cuts Work

Making Work Worth While

According to October 11, 2006 news reports, the Federal deficit (the amount by which government spending exceeds tax and other government revenues) has shrunk to its lowest amount in four years.

In addition to being good news, it also showed that the tax cuts implemented by the Bush administration are working.

The tax cuts are working in that they are generating more revenue than before they were cut.

Why does cutting taxes result in MORE tax money being collected? The short answer is that by reducing tax rates (the percent of tax collected on each dollar of income) the government encourages people to work and earn more.

Library of Congress WW II Photo

"Even as you and I, the soldier at this time of year may be found, whenever there is time , scratching his head over the complex of his income tax return. Private Jack Lewis is deep in the annual problem."
"Even as you and I, the soldier at this time of year may be found, whenever there is time , scratching his head over the complex of his income tax return. Private Jack Lewis is deep in the annual problem."

Just as a business will often opt to reduce the price of its goods in order to increase the amount sold, the government is basically reducing the cost of working and thereby encouraging people to work and earn more.

While it takes less in taxes on each dollar taxpayers earn, it collects the smaller amount from a much larger base of income thereby raking in a larger amount of tax dollars from a larger volume of taxable income.

The longer explanation has to do with the progressive nature of our tax system.

Our Federal income tax has a series of rates rather than one rate. Basically, what the government does is set a schedule of tax brackets, say $1 -$20,000 worth of income is taxed at 10%; 20,001 - $30,000 at 20%; and $30,001 and above at 50%.

In this scenario , everyone, from the poorest to the richest taxpayer pays 10% of the first $20,000 worth of income. A wealthy person earning $100,000 per year pays 10% of the first $20,000 she earns while the high school student with a part-time job earning $10,000 pays 10% of his income.

While the high school student just pays his $1,000 in taxes (10% of $10,000); the wealthy person also has to pay 20% or $2,000 on the income earned between $20,001 and $30,000 and another $35,000 in taxes on the income between $30,001 and $100,000 (50% of the remaining $70,000 of income).

By reducing the top bracket rates, the government provides more incentive to work (prior to Ronald Regan, the top rate in the U.S. was about 90%, while in England the top rate at that time was something like 101% which resulted in the taxes on the income in the last bracket being more than the amount earned).

Once a person earns enough to pay their basic living expenses (food, clothing and shelter) they can afford to choose between work and leisure. The higher the marginal tax rates (the taxes on the marginal or last amount of income earned) the less incentive one has to work.

The idea behind the high rates is that the high marginal rates apply only to rich people who can afford the taxes because it does not deprive them of the money needed for life's basic needs.

This is true, However, since they have already earned enough in the lower brackets to pay for their basic needs, they now have a choice between working all day and having the government tax most of the recent income away or quit work for the rest of the year and play golf.

When people stop working, they stop stop producing (meaning there are fewer goods being produced for the rest of us to buy) but they are also not making any money that the government can tax. If the tax on income in excess of, say $30,000 is 90% and people stop working as soon as their income for the year reaches $29,999 then the government gets to collect taxes at the rate of 90% of nothing.

Most of us can't stop working when our income reaches a certain figure. However, higher income people are often professionals who have some control over the hours they work.

Thus, people like doctors, lawyers, stockbrokers, etc. can usually control their hours and cut back as their income rises.

Former President Regan himself experienced this while he was an actor. As a star actor he was in a position to accept or reject a script. He calculated that making five pictures per year put his income just below the highest bracket. So, if he did a sixth picture, most of the income would go to Uncle Sam. As a result he limited himself to 5 pictures per year and spent more time with his family.

With other actors doing the same, the public had fewer shows to watch. However, this did not stop with star actors working less and the public making do with fewer new movies. With fewer shows being made, there was less work for lower paid actors who were below the star level as well as all the other behind the scenes people who help to make a movie.

Not only did the government lose taxes on the extra money that the star actors would have made if they had not voluntarily left the workforce but it also lost the taxes the larger group of lower paid actors and other workers would have made if they had not been laid off involuntarily due to lack of work.

While people making lower incomes usually cannot temporarily stop working on their regular job in order to avoid being pushed into a high rate tax bracket, they can keep their income down by turning down extra work.

The factory worker who accepts less overtime because additional overtime will throw him into a higher tax bracket. The person working a part-time job in addition to their full time job who quits the part-time job because most of it goes to taxes.

Finally, the working spouse. In many cases one spouse, due to education and experience, will have a considerably higher income than the other spouse. With high marginal taxes, couples in this situation will find that the income from the lower income spouse is not worth the effort because most of it goes to taxes.

How is this so? Well, for most households income taxes are calculated on the combined incomes of the husband and wife. Let's assume a 90% tax on incomes in excess of $40,000 and assume that the husband earns $39,999 and the wife earns $20,000.

With a 90% tax the $20,000 being brought in by the wife works out to an additional income for the household of $2,000 because $18,000 of her income is taxed away. Unless the husband is able to cut his hours and reduce his income by $20,000 to keep the household income at $39,999 it does not make sense for the wife to continue working.

By reducing high marginal tax rates more people have the incentive or opportunity to work and more people have the incentive to work longer hours and this not only generates more goods and services but a much larger income base on which to levy taxes.

So, why do deficits increase every time the government cuts taxes? While reductions in tax rates begin immediately, which causes a temporary drop in government revenues, the adjustment process takes a while as people slowly realize that their paychecks are suddenly larger and could be even larger if they worked more.

Along with this realization process, there is also a lag between people deciding to work more and actually finding that work.

The other, more important, reason why deficits initially balloon when taxes are cut is that Congress not only refuses to cut spending but continues increasing spending.

The Politics of Tax Cuts

As promised in my comment above, I will try to elaborate on the points which livelonger and Ralph Deeds have raised.Both livelonger and Ralph Deeds expressed concern about the deficits that follow tax cuts.

As I explained above, cutting taxes does temporarily reduce government revenues and this will result in a deficit. However, the large deficits that accompanied both the Regan and Bush tax cuts were the result of Congress insisting on charging ahead with increased spending. As former U.S. Treasury Secretary Paul O'Neill once observed,

"There is a constituency in the Congress that sees the tax code as a way to do favors for people which is a way to get elected that's not as obvious as actually writing them a check from the American people”.*

This is the sad truth about modern politics. Members of Congress get elected by lining up single issue special interest groups who deliver their group's block of votes in exchange for the local Congressman or Senator providing funds for their favorite projects. Without the votes of these special interest groups few members of Congress would survive more than one or two terms in office. As of this writing (October 21, 2006) the country is upset with the job being done by Congress and, as the majority party in both houses, the Republican party stands a good chance of losing one or both houses in the upcoming elections. However, don't be surprised if the Republicans retain control of both houses, because, as a few observers have pointed out, the American people are fed up with Congress as a whole but many give high marks to their local representative and senator. Leaders of both parties acknowledge this fact when they give the expected optimistic reply that they expect a major victory in November and then immediately qualify that with former House Speaker Sam Rayburn's reminder “that all politics is local”. This quote about all politics being local is what you will be hearing from the losing party in November as they try to explain away this year's defeat.

So, what about the deficit? In financial terms, a deficit is nothing more than current spending exceeding current income. Individuals, households and governments run deficits all the time as their income on any particular day or week (or month or quarter in the case of the government) comes in periodic lumps rather than a smooth daily flow. A couple of days ago, I purchased gas and a few groceries using a credit card (temporary debt) for one and cash left over from my last pay check (drawing down savings) for the other. Since I received no income that day, my household was in deficit. Yesterday, I purchased lunch and my wife filled her car with gas. I also received my pay for the past two weeks so our income for the day was much greater than our expenses leaving a large surplus in our checking account. In the coming days I will draw down the surplus (which by then will be considered past savings) in our checking account to pay the credit cards thereby clearing up the short term debt that was used to finance the deficits of the past two weeks. In this sense the only difference between the U.S. Treasury and my management of our household finances is magnitude – the U.S. Treasury both receives and spends much greater sums than our household, but the process is the same. If short term deficits cannot be offset with short term surpluses, then both households and governments have to clear such deficits with longer term debt. This is where we run the risk, in the case of government, of saddling future generations with today's deficits. Households are limited in the amount they can borrow by the quality of their credit scores and their income. Households can only handle so much debt then they have to stop spending.

But governments are different. Their income comes from taxes which taxpayers have to pay or else. However, tax cuts are popular and, when people come to realize that taxes can go down as well as up, they become resistant to tax increases. This means that Congress, just like ordinary household faces a ceiling beyond which they cannot continue spending because they no longer have access to the tax hikes needed to sustain the spending. This is why deficits have suddenly become very important to the political elites. Congress needs money to spend on projects favored by special interests in order to guarantee re-election. However, if they have to raise the money by increasing taxes they risk angering a larger group of voters and this could also cost them the election.

The dispute here is not over whether cutting high marginal tax rates encourages people to work and earn more or whether deficits are good or bad. Paul Krugman himself acknowledges that my description of how tax cuts work is correct when he states in the third paragraph of the third section of his article entitled The Tax-Cut Con (which Ralph Deeds kindly provided), that:

"The starting point of supply-side economics is an assertion that no economist would dispute: taxes reduce the incentive to work, save and invest. A businessman who knows that 70 cents of every extra dollar he makes will go to the I.R.S. is less willing to make the effort to earn that extra dollar than if he knows that the I.R.S. will take only 35 cents. So reducing tax rates will, other things being the same, spur the economy." **

Remove all of the rhetoric and, angry charges and half truths levied by both sides in the debate and what you have left is the real point of contention which is whether we should have more government or whether we should have less government. This is an argument about politics, not economics. Economics is just a tool used by politicians to achieve a political end. The tool is neutral and can be used by either side. President Kennedy introduced a tax cut when he came into office in 1960 and the Republicans promptly opposed it for both political and economic reasons.

Politically active economists on the left, like Krugman and the late John Kenneth Galbraith, while agreeing with the economic theory behind the tax cuts, have opposed them for the simple political reason that most voters like the idea of paying less taxes and having more money for themselves. However, lower taxes mean smaller government and the smaller the federal government the less able it is to pay for the schemes advanced by special interest groups. Krugman makes it very clear in his article that he doesn't want the federal government to be shrunk to pre-New Deal levels. Galbraith also made it very clear the he favored big government and high taxes and went so far as to imply, in The Affluent Society and other books, that the government, not the citizens who worked and earned the income, should be the one to determine how the wealth of the nation should be spent.

Krugman, in the third from the last paragraph in his article entitled The Tax-Cut Con, states the choice very clearly when he states:

"If Grover Norquist is right -- and he has been right about a lot -- the coming crisis will allow conservatives to move the nation a long way back toward the kind of limited government we had before Franklin Roosevelt. Lack of revenue, he says, will make it possible for conservative politicians -- in the name of fiscal necessity -- to dismantle immensely popular government programs that would otherwise have been untouchable." **

Reply to Ralph Deed's Questions in Comment Number 13

The first question in Comment 13 was “Do you agree that tax cuts for the middle class and low income groups are more stimulative than those for the rich as in the case of Bush's cuts?”

The answer to this depends upon what one means by “stimulative”. As I explained in the new Hub that I just published, “Democratic vs Republican Tax Cuts”, the Keynesian style tax cuts favored by Democrats are designed to stimulate demand by getting people to spend money and buy more, while the supply side tax cuts favored by Republicans are designed to stimulate work and investment to produce more. From a strictly economic point of view, the answer depends upon whether you want to stimulate demand or supply. Going a step further, the only reason one would want to stimulate demand would be if the economy was in a downturn with high unemployment AND policy makers did not want to have prices or wages fall (as was the case in the 1930s when laws supported business cartels and union wage agreements that did not allow for downward adjustment of prices and wages). In this case, a Keynesian style tax cut would stimulate demand. However, Keynesian style tax cuts are inflationary and deliberately lead to deficits, so I don't see how such a cut would do any good for today's economy given our low rate of unemployment. Now, if you are proposing a tax cut in the lower brackets along with corresponding simultaneous cuts in spending (so that it will not be inflationary or cause the deficit to rise) I would be all for it since I am a middle class taxpayer and my household would benefit from such a tax cut.

As to your comment about tax cut for the oil industry this is a stretch, as I believe that you are referring to the attempt earlier this year by Democrats in Congress to impose a special tax on oil company profits (a so called “windfall profits” tax). I really don't see how failure to enact a special tax on one group of citizens constitutes a tax cut. Using this logic, the Democrats in Congress could be accused of increasing the estate tax. Since President Bush proposed that this tax be eliminated and the Democrats in Congress have prevented this from being enacted then, using your logic, they are guilty of increasing the estate tax.

As to Social Security and Medicare, these programs are nothing more than a tax on working people to fund a welfare program for retired people. This is not something that I or some other conservative dreamed up. It is a summation of the arguments presented to the Supreme Court in the 1937 case of Helvering vs Davis and the 1960 case of Flemming vs Nestor. In the first case Guy T. Helvering, Commissioner of the Internal Revenue Service under President Roosevelt successfully argued that the Social Security Act was not an unconstitutional expansion of power by the Federal Government into the area insurance and pensions, but was the simple exercise of the Federal Government's right under the Constitution to levy taxes and promote the general welfare. During oral arguments in this case, Chief Justice Charles Evans Hughes made comments to the effect that what the government was saying was that Congress could repeal the tax or the welfare portion, or both, at any time.

In the 1960 case of Flemming vs Nestor, President Eisenhower's Secretary of Health Education and Welfare, Arthur Flemming, successfully argued that Congress had the right to change the Social Security Act in any way they wished, as this was nothing more than a tax program and a general welfare program that happened to be linked. If you go to the Social Security Administration's website (www.ssa.gov/history/nestor.html) you will see that it sums up the Nestor case as follows:

The fact that workers contribute to the Social Security program's funding through a dedicated payroll tax establishes a unique connection between those tax payments and future benefits. More so than general federal income taxes can be said to establish "rights" to certain government services. This is often expressed in the idea that Social Security benefits are "an earned right." This is true enough in a moral and political sense. But like all federal entitlement programs, Congress can change the rules regarding eligibility--and it has done so many times over the years. The rules can be made more generous, or they can be made more restrictive. Benefits which are granted at one time can be withdrawn, as for example with student benefits, which were substantially scaled-back in the 1983 Amendments.

There has been a temptation throughout the program's history for some people to suppose that their FICA payroll taxes entitle them to a benefit in a legal, contractual sense. That is to say, if a person makes FICA contributions over a number of years, Congress cannot, according to this reasoning, change the rules in such a way that deprives a contributor of a promised future benefit. Under this reasoning, benefits under Social Security could probably only be increased, never decreased, if the Act could be amended at all. Congress clearly had no such limitation in mind when crafting the law. Section 1104 of the 1935 Act, entitled "RESERVATION OF POWER," specifically said: "The right to alter, amend, or repeal any provision of this Act is hereby reserved to the Congress." Even so, some have thought that this reservation was in some way unconstitutional. This is the issue finally settled by Flemming v. Nestor.”

What Social Security has done is tax workers to support retirees. Until tax sheltered IRA and 401(k) type accounts came into existence, the Social Security tax and the income tax, made it very difficult for people to save for retirement. This left retirees largely dependent upon the government for their financial survival. The Social Security Administration, in the two paragraphs above, makes it very clear that a Social Security “pension” is no different than any other federal entitlement program which can be changed at will by Congress. The only thing unique about Social Security is that those who have paid into the program should be able to expect to receive benefits upon retirement, but only “in a moral and political sense”, there is no legal right to Social Security benefits regardless of how long and how much one has contributed. People who purchased Enron stock had more legal rights than those who contribute to Social Security every payday. Just as Nobel Laureate Frederich Hayek warned in his 1944 book, The Road to Serfdom, programs like this are leading us backwards toward serfdom, rather than forward.

Neither Social Security nor Medicare are structured in a way that would provide either program with any type of solvency other than faith that Congress will appropriate sufficient funds for them each year. There is no Social Security trust fund (the so called trust fund consists of a special class of bonds that are purchased only by the Social Security Administration – these bonds are similar to a person stuffing money into their mattress each week to save for retirement, but then pulling money out as needed for other things and replacing it with IOUs – you can imagine what their retirement will be like) and there are no Medicare reserves. The whole system is based upon trusting Congress to live up to their “moral and political” obligation to keep funding the program.

But what happens if the ratio of supporters to opponents shifts and opponents outnumber supporters – will morality or politics guide Congress in deciding which group to please and which to anger? Even if Congress does take the high road, it would only take a couple of elections to change the balance of power in Congress.

The sensible thing to do is to start dismantling the system now by first making provision to continue support for those already retired and those who are about to retire. Give those who are within ten to fifteen, or even twenty years of retirement age give the choice of a cash buyout based upon the contributions to their accounts (employer and employee plus interest) or staying in the program and receiving benefits based upon today's existing law. However, invest the Social Security contributions of this group into annuities, so that the taxpayers will only have to make up the difference between the annuity payments and today's benefit levels. For everyone else, abolish both the tax and the welfare portions of the program. Except for those close to retirement who elect to stay in the program and pay the Social Security taxes there would be no more Social Security or Medicare taxes and support for those already retired would be paid out of general tax revenues.

Actually, the breaking point may come sooner rather than later. While waiting for my son to finish work the other day, I happened to see a copy of the October 23, 2006 issue of The Financial Times which had an article in the top left corner of the front page which described how the independent Financial Accounting Standards Advisory Board (FASAB) is considering an accounting rule that would require the Federal Government to account for the liabilities accrued for future entitlements in the Social Security, Medicare and other entitlement programs. Just as private corporations now must do with their future pension liabilities, the government would have to acknowledge on a yearly basis just how much it will need to pay for future entitlement claims and set money aside to meet these claims. The government, of course, is opposing this accounting rule change as it would force them, on an annual basis, to explain to the citizens who are being forced to pay into these programs, just how they plan to guarantee the promised benefits. On the one hand it will strengthen the promise to older workers that the money will be there to pay them. On the other hand, it will also provide an annual reminder to the younger workers just what these escalating future liabilities will require them to pay for with rising taxes. With tax sheltered IRA and 401(k) type accounts offering these younger workers a much better payout at a lower cost, we may see demands for abolition of the system by younger workers sooner, rather than later. We have already seen corporations, when forced by similar rules to face these potential liabilities in their owned defined benefit pension plans, quickly shift away from such plans by providing newer workers with defined payment plans (401(k) type plans) which the individual workers own and the employer is only responsible for their promised annual contributions during the worker's term of employment.

The U.S. Government is under no obligation to accept the new FASAB rule even if the rule is passed by the board, as FASAB merely sets standards for the accounting profession However, after all the political grandstanding over corruption in private corporations and the passage of laws requiring private corporations to follow FASAB guidelines in their accounting, it would be difficult for the government to announce that it was not going to follow FASAB rules in its own accounting. Foreign governments are also very concerned about this rule being passed and the U.S. Government following it, least their citizens demand the same type of accountability from them. Now might be a good time to re-read Hans Christian Anderson's tale about “The Emperor's New Suit”, but substitute “the Welfare State” for the “Emperor” and “FASAB” for the little child.

Library of Congress photo from 1940s Promoting Social Security.

Caption reads: Old-age and Survivors Insurance Under the Social Security Act. Every man wants security and happiness for his family. Wage earners covered by the Federal Old-age and Survivors Insurance System can look forward [remainder of caption mis
Caption reads: Old-age and Survivors Insurance Under the Social Security Act. Every man wants security and happiness for his family. Wage earners covered by the Federal Old-age and Survivors Insurance System can look forward [remainder of caption mis

44 comments

sn53Anon profile image

sn53Anon 5 years ago from Huntsville, AL

Nice. I will be back.


Chuck profile image

Chuck 5 years ago from Tucson, Arizona Author

Sam - thanks for the update. I found or heard about the 101% top rate in Britain when I was in grad school in the 1970s but did not attempt to verify that when writing the Hub. So I may have been off a couple of points - however, even a 99% rate is still a big disincentive not to work extra or invest.


Sam 5 years ago

Just in reference to the top artical about the top tax rate in Britain prior to the Thatcher Government wasn't 101%, but 83% with an additional 15% taxed on 'unearned income', amounting to 98% for the very top (this was reduced to 60% in the 1979 budget, the first of her govt). When Mrs Thatcher left power 11 years later, the top rate was 40% and tax receipts significantly increased in 1988 after she cut the top rate from 60% to that amount.


mel22 profile image

mel22 6 years ago from ,

This Article was from 3 years ago but with the current debate in late 2009, I found this article to be very" informative" on a topic i knew little about. I never understood "entitlements". I would be in favor of the S.S. buyout and turning it into an IRA or other type of account. As far as the manditory med.insurace premiums would I be able to lower those by "checking" options that I do not smoke , do not drink , do not skydive, do not partake in things that generally have risk to self and would I receive special cuts in premiums if I show that I belong to a fitness center, show receipts that I take health supplements, and partake in things that promote general well being?


Ralph Deeds profile image

Ralph Deeds 8 years ago

By PAUL KRUGMAN Published: June 16, 2008

A poison pill, in corporate jargon, is a financial arrangement designed to protect current management by crippling the company if someone else takes over.

As I read the nonpartisan Tax Policy Center’s analysis of the presidential candidates’ tax proposals, I realized that the tax cuts enacted by the Bush administration are, in effect, a fiscal poison pill aimed at future administrations.

True, the tax cuts won’t prevent a change in management — the Constitution sees to that. But they will make it hard for the next president to change the country’s direction.

Exhibit A of the poison pill in action is the sad case of John McCain, part of whose lingering image as a maverick rests on his early opposition to the Bush tax cuts, which he declared excessive and too tilted toward the rich.

Since then the budget surpluses of the Clinton years have given way to persistent deficits, and income inequality has risen to new heights, vindicating his opposition.

But instead of pointing this out, Mr. McCain now promises to make those tax cuts permanent — and proposes further cuts that are, if anything, tilted even more toward the wealthy. And how is the loss of revenue to be made up? Mr. McCain hasn’t offered a realistic answer.

You can explain though not excuse Mr. McCain’s behavior by his need to shore up relations with the Republican base, which suspects him of being a closet moderate. But he’s not the only one seemingly trapped by the Bush fiscal legacy.

Barack Obama’s tax plan is more responsible than Mr. McCain’s: relative to current policy, the Tax Policy Center estimates, the Obama plan would raise revenue by $700 billion over the next decade, compared with a $600 billion loss for Mr. McCain.

The Obama plan is also far more progressive, sharply reducing after-tax incomes for the richest 1 percent of Americans while raising incomes for the bottom 80 percent.

But while $700 billion may sound like a lot of money, it’s probably not enough to pay for universal health care, which was supposed to be the overriding progressive priority in this election.

Why doesn’t Mr. Obama propose raising more money? Blame the Bush poison pill.

First of all, Mr. Obama — like, to be fair, his main rivals for the Democratic nomination — isn’t willing to challenge the Bush tax cuts as a whole. He only proposes rolling back tax cuts for those making more than $250,000 a year.

Second, Mr. Obama proposes giving back a substantial part of the revenue raised by this partial tax-cut rollback in the form of new tax cuts.

These tax cuts would mainly benefit lower- and-middle-income families, although this can’t be said of Mr. Obama’s plan to eliminate income taxes on seniors with incomes under $50,000: since most seniors already pay no income taxes, this would do nothing for those most in need. And one wonders why we should create the precedent of exempting particular demographic groups from taxes.

But the big question is, are these tax cuts, however appealing, a top priority? The most expensive proposal, under the title Making Work Pay, would give most workers $500 in tax credits, at a 10-year cost of more than $700 billion. Isn’t it more important that workers be assured of health care?

The problem, I believe, is that even Democrats have bought into the underlying premise of the Bush years — that the best thing you can do for American families, or at least the only thing that can win their votes, is to give them a tax break.

One more thing: on Friday Mr. Obama declared that he would “extend the promise” of Social Security by imposing a payroll-tax surcharge on people making more than $250,000 a year. The Tax Policy Center estimates that this would raise an additional $629 billion over the next decade.

But if the revenue from this tax hike really would be reserved for the Social Security trust fund, it wouldn’t be available for current initiatives. Again, one wonders about priorities. Whatever would-be privatizers may say, Social Security isn’t in crisis: the Congressional Budget Office says that the trust fund is good until 2046, and a number of analysts think that even this estimate is overly pessimistic. So is adding to the trust fund the best use a progressive can find for scarce additional revenue?

Anyway, back to my main theme: looking at the tax proposals of the two presidential candidates, it’s remarkable and disheartening to see how effective President Bush’s fiscal poison pill has been in restricting the terms of debate.

Progressives, in particular, have to hope that Mr. Obama will be more willing to challenge the Bush legacy in office than he has been in the campaign.

More Articles in Opinion »


Newsletters 8 years ago

Great article, and even better discussion going on here.


Ralph Deeds profile image

Ralph Deeds 8 years ago

Chuck, I just noticed your post and link to the NYT article on the Netherlands tax haven. I'm not sure what you are suggesting for the U.S. but I'm not favorably impressed by what the Netherlands has done to permit Richards and his buddies to pay only 1.5% taxes on $450 million of earnings only a tiny amount of which they earned in the Netherlands.

Further, I wonder what your suggestion is for how we are going to pay for Bush's $3 Trillion dollar war, his Medicaid drug plan, let alone repair our country's aging infrastructure which is looking more and more like a bannana republic, while at the same time cutting taxes on rich individuals and oil companies who have a windfall from $3 dollar a barrel oil and are making record profits. The starve the beast philosophy hasn't been working very well lately. Your buddy Milton Friedman has led the country down a privatized rathole!


john bowie 8 years ago

The tax cuts issue is high on the agenda here in New Zealand where record surpluses have not translated into tax cuts, due mainly to the political agenda of the ruling clique.


accounting book keeping 8 years ago

Useful article, good information. Great job!


Ralph Deeds profile image

Ralph Deeds 8 years ago

Professor Susan Pace Hamill says 18 states, especially Alabama, seriously violate biblical principles in the way they tax and spend. "At a time when some voters are asking how the religious views of candidates will shape their policies, a professor's discovery of how little tax the biggest landowners in her state paid to finance the government has prompted some other legal scholars to scour religious texts to explore the moral basis of tax and spending policies....Professor Hamill says that since Jedeo-Christian ethics 'is the moral compass chosen by most Americans, it is vital that these policies be compared with the texts on which they are based."

Bottom line: the poor are over-taxed and the rich under-taxed according to Professor Hamill's conclusions based on the Bible. The worst offenders: Alabama, Florida, Louisiana, Nevada, South Dakota, Texas. She calls them the "sinful six."

http://www.nytimes.com/2007/12/25/business/25tax.h...


Mark 8 years ago

Are you kidding? No one wants to tax wage earners more. What a crock.

My brother runs a small printing company -- makes about the same income as I do. Yet he pays far higher taxes - and he has to meet a payroll and provide jobs, insurance, andpay the taxes, for his workers. Plus he works very hard.

Can you explain to me why my cap gains on Chinese and Candadian investments should hardly be taxed at all -- while his business is taxed far higher?

Tax all income alike - dont punish work. WOrk includes self employed, small business, doctors, dentisits, house painters. Work is punished in this country - its taxed up to 300% higher than cap gains and dividends. Thats the travesty in this country -- and almost no one is talking about it.

And dont give me that nonsense about cap gains deserves far lower tax rate cause it creates jobs -- cuase I make cap gains -- and dividends. My cap gains come from Chinese and Canadian mining stocks -- so Im not creating any jobs here. My brother creates jobs -- and he is taxed high. I dont create jobs - and I am taxed low. SO its an absurd myth that cap gains always creates jobs. It just doesnt.

My neighbors make about the same income I do also - and both work their rear ends off for wages. They dont get vacation, or sick pay, and dont have insurance. I pay far less taxes than they do. THe go to work almost every day - and struggle. How is their work contribution far less than mine.

Keep things simple - tax all income types the same. Let the market work. Quit punishing work, self employed, small business.

If you want to hear the idle rich scream bloody murder -- tell them they will have to pay the same tax rates as workers -- and pay the FICA workers or self employed pay. Give the idle rich the exact same tax deal as you give the self employed, the wage earner. Thats a great test. Give them the exact same deal - and they will scream bloody murder. THats how you can tell that the idle rich know they are screwing the hard working folks in this country.

One more thing -- I worked for wages for 30 years -- and paid far higher taxes than I do now. And I never turned down over time -- in fact, guys would lie cheat and steal to get overtime.


Education Articles 8 years ago

Fairplay my friend that is one large amount of information and all gratis. What a guy, thanks so much for putting this great hub page together!


Davis 9 years ago

I like this post! I enjoyed reading it!


Jim 9 years ago

I like this post! I wish more people knew that!


Adam 9 years ago

I like this post! It's always great to learn something new!


Kacy 9 years ago

I like this post! It's good to be broad-minded.


Dene 9 years ago

Good post! I found it intresting!


Chuck profile image

Chuck 9 years ago from Tucson, Arizona Author

Ralph, Thanks for your recent comments. Here is a link to an article in today's (Feb 4, 2007) New York Times that you might be interested in. It seems that wealthy people, including entertainers like members of the Rolling Stones, U2, etc. are following businesses, including American corporations like Sun Microsystems, Coca-Cola, etc. to the Neatherlands because, of all things, they are concerned about making sure that their heirs, rather than the government, gets their money upon death. We are not talking about supposed loss of revenue due to tax cuts here but, rather, loss of ALL tax revenue to the U.S. and other countries of citizenship, from death taxes on these people when they die. This just shows that people, even champions of big government and high taxes (on other people) such as rock stars react to high taxes and take steps to avoid them whenever possible. Try convincing the Dutch government that lowering taxes doesn't pay off when foreigners rush to pay their taxes to Holland rather than their own governments.

Please note in the third paragraph of the article that, over the past 20 years, the Dutch government has collected a total of $7.2 MILLION dollars from Jager, Watts and Richards with their low 1.5% tax on the three performer's $450 million in earnings that they channeled through Dutch tax shelters while the British government with their "sock it to the rich" 40% rate collected $0 on this $450 million their three citizens earned.

http://www.nytimes.com/2007/02/04/business/yourmon...


Ralph Deeds profile image

Ralph Deeds 9 years ago

Who was Milton Friedman? by Paul Krugman http://www.nybooks.com/articles/19857


Ralph Deeds profile image

Ralph Deeds 9 years ago


Ralph Deeds profile image

Ralph Deeds 9 years ago

Re: Voodoo economics, i.e., supply side tax cuts, Bush's recent appointee Ben Bernanke, Fed Chairman, in testimony before a Senate committee several times said quite emphatically that the revenue lost due to tax cuts is not made up by increased tax revenues due to ecnomic growth. He was also quite emphatic about the need to balance the budget and either cut programs or adopt taxes to pay for them. He was referring primarily to Medicare and Social Security. Bush's tax cuts for the wealthy have accelerated the trend toward income inequality in this country which has resulted from globalization and freer trade and which is contributing to instability in our free enterprise system.

http://hubpages.com/politics/Two_Views_of_the_Gree... Two Views on the Greed Factor


Ralph Deeds profile image

Ralph Deeds 9 years ago

Except on Israel-Palestine issues, the NY Times is the most reliable and credible newspaper in the country. It's actually pretty conservative, contrary to what Rush Limbaugh says. Which sources do you prefer over the NYT? Also, it has the widest coverage of any paper--travel, sports, business and finance, religion, politics. It's editorials and op-eds support the Demorats more often than not. But the news coverage is quite accruate and complete nearly always. BTW in case you didn't notice the Times quickly fired Jason Blair and Howell Raines the editor after the scandal came to light. Also, I believe Judith Miller, Bush's front page parrot on Iraq was fired or allowed to resign also. Jason Blair was a little pipsquead writing human interest stories. Judith Miller was acting as Ahmad Chalabi's and Dick Cheney's stenographer on WMD. She printed all the lies they fed her.


Julius 9 years ago

Ralph, citing the NYT for most of your info for economic theory is like using the tabloids for a history report. read some journal or magazines with merit and that don't employ jason Blair(?)-type reporters. the NYT is not very credible and is EXTEMELY biased.

though you have some good points, and i feel this hub is oversimplified (if the rich are always paying so much, then why do we have the alternative minimum tax?? --101%, hah!)


VMAX 9 years ago

I have enjoyed following the dialog over the past few wks. It find it amazing that some blame an individual (namely Pres. Bush) for all our woes, considering our economy is fairly strong. Let me say, I am neither an economist or liberal. I have spent the majority of my adult life in public service (military; education; & county govt). In these career fields I've seen many people retire early because they had reached a point of deminished return. In other words it was costing them more in taxes to continue to work then what they could receive from retirement (not including soc sec). I myself retired at age 60 and draw from an employee owned state run retirement system like bobmnu mentioned. I have now started my own small art business w/o fear of loss of retirement income. This much I know, supply side economics and the Bush tax cuts work for me. I am far from being considered wealthy but I've worked hard enough and invested wisely enough to say I'm comfortable. I don't have a lot of articles to reference that support me, but I do know that I'm not in debt, my home is paid for, I'm able to work and enjoy our American life style. For me that's where the rubber meets the road.


Chuck profile image

Chuck 9 years ago from Tucson, Arizona Author

Thanks for the comment and advice. I used to enjoy listening to Dr. Savage while driving home from work, but my schedule changed and I haven't had the opportunity recently.


wajay_47 9 years ago

Good hub, Chuck. For your liberal commenters, I would laugh and then suggest they visit Dr. Michael Savage at http://www.homestead.com/prosites-prs/index.html Dr. Savage says, "Liberalism is a mental disorder!" LOL!


bobmnu 9 years ago

I am an early retiree from Education who has a employee owned state run retirement system just like Pres Bush proposed. My retirement system allowed me to retire, early, at 55, and collect almost twice the amount that I will get from Social Seruritywhen I reach 65 and I can earn as much as I want and not have my pension reduced, like SocialSecurity. The interesting thing is that I havecontributed more to Social Security over the years than my employeed owned system. The only role the state has in the system is to collect the money and turn it over to the Board that we elect to manage our money. I would love to have my children take the money from SS and beabletoinvest in like the Teachers Retirement and live very comfortable in their retirement.

As to tax cut I have noticed over the years that anytime the Democratics give a tax cut or break to the lower or middle class my standard of living goes down, and when the tax break is given to the upper class or wealthy my standard of living goes up. My wife and I make a combined income of just over, $100,000, per year and we are not rich. I have to pay the full cost of my four childrens college education, their health insurance and mine and my wife's professional education. I hold a BS and 2 MS dergees and my wife holds a BS and many advanced Graduate Credits, that we paid for to get to the status we are now in our life. We also have a total of 55 years experience in our profession.

I have seen the Great Social Programs of the Liberals up close and personal. When working toward a MS degree I was teaching at the college level and had students who were taking classses and failing because as they told me they only had to pass one of every three semester to keep their financial aid and college beat working. My tax dollars at work. President Clinton got passed the College Tution Tax Credit passed to help the Middle Class. The Middle Class was defined as those people who made, $60,000, or less per year. Those


Chuck profile image

Chuck 9 years ago from Tucson, Arizona Author

Ralph, thanks again for your comments. Please see Text Capsule 3 above with my responses to your questions in Comment 13 concerning Social Security and Medicare.



Ralph Deeds profile image

Ralph Deeds 9 years ago

Effect on employment or unemployment, that is.


Ralph Deeds profile image

Ralph Deeds 9 years ago

Effect of increasing the minimum wage--"Not much," Alan Blinder former vice-chairman of the Federal Reserve. http://www.nytimes.com/2006/10/25/business/25leonh...


Ralph Deeds profile image

Ralph Deeds 9 years ago

Do you agree that tax cuts for the middle class and low income groups are more stimulative than those for the rich as in the case of Bush's cuts?

If memory serves me Bush has given a tax cut windfall to the oil industry which hardly seems necessary at this time of record profits.

Do you support cuts in Medicare and Social Security? If not how do you proposed to fund Medicare in the face of escalating health care costs and increasing numbers of retired citizens relative to active workers?

Perhaps Bush will be more willing to veto pork if the Democrats win control of the House and/or Senate?


Iðunn 9 years ago

Ralph Deeds is right and he's got it covered saving me a ton of work.

Here are a couple more links:

Myth: Tax cuts spur economic growth.

http://www.huppi.com/kangaroo/L-taxgrowth.htm

Myth: Tax cuts increase tax collections.

http://www.huppi.com/kangaroo/L-taxcollections.htm

Myth: A capital gains tax cut will spur the economy.

http://www.huppi.com/kangaroo/L-capgainsspur.htm

Myth: A capital gains tax cut will help the little guy.

http://www.huppi.com/kangaroo/L-capitalgains.htm

and for those who think taxes are theft by government:

http://www.huppi.com/kangaroo/L-taxestheft.htm

http://www.huppi.com/kangaroo/L-earnedmoney.htm

This stuff is somewhat dated, but I love that source. God knows what kind of a field day he'd have with Bush's bullshit if he updated for the recent economic developements.


Ralph Deeds profile image

Ralph Deeds 9 years ago

The fruits of de-regulation are not always sweet, for the public, that is although they may be very sweet for Wall Street.


Ralph Deeds profile image

Ralph Deeds 9 years ago

The fruits of deregulation are not sweet. http://www.nytimes.com/2006/10/23/business/23utili...


Ralph Deeds profile image

Ralph Deeds 9 years ago


Ralph Deeds profile image

Ralph Deeds 9 years ago

Is this what you have in mind as a tax cutting, de-regulating, small government advocate?


Ralph Deeds profile image

Ralph Deeds 9 years ago

Why would anybody want to dismantle "immensely popular government programs" like Social Security and Medicare? Everything I've read indicates that we will soon be facing a huge problem paying for Medicare. Bush's tax cuts will therefore be unsustainable.

If Bush had wanted to stimulate the economy through tax cuts, he would have been better-advised to concentrate the cuts on middle and lower-income taxpayers who spend a much higher proportion of their income than the highest income taxpayers who received most of the benefit from Bush's tax cuts.

Taxes and public expenditures in the United States are much lower than in most other industrialized countries where health care is better and the roads have fewer potholes.


Chuck profile image

Chuck 9 years ago from Tucson, Arizona Author

Here is the remainder of my comments from above:

...accepted it after some arm twisting and the comment was always “Why bother it all goes to taxes anyway.” Most didn't understand the concept of tax brackets and usually paid someone else to do their taxes, but they were able to calculate the extra gross income from the overtime and were very disappointed when the increase in their net pay for the week in question was far below that amount.

I am working on an additional capsule for this hub and will elaborate on both of your points further in that capsule.

Thanks again, for your comments.


Chuck profile image

Chuck 9 years ago from Tucson, Arizona Author

Thank you both for your comments. Ralph, thank you also for the links to the opposing views by Paul Krugman.

I apologize for not replying sooner but, in addition to my other work and family responsibilities, it took me a while to read and digest the three articles you linked, especially the 7,000-word New York Times piece entitled "The Tax-Cut Con" from the second of your three links.

I admit that I am a free market conservative and am in favor of the existing tax cuts. While I am in favor of supply side tax cuts, the intent and focus of my article was to explain how and why tax cuts result in both higher tax revenues in the long run as well as a deficit in the short run. Most contemporary economists agree that the economic effect reducing high marginal tax rates provide an incentive for people to work and earn more money as I have described. However, there is considerable dispute over the desirability of the political results of tax cuts. This is the essence of Dr. Krugman's criticisms in his article entitled "The Tax-Cut Con". Krugman's article isn't concerned about the economic growth aspect of the tax cuts. His main concern is that the current tax cuts will make it difficult for future administrations to raise taxes. For Krugman this is bad because he believes government should be bigger, not smaller, and that government should take and control a larger share of the nation's output. He is entitled to his opinion and he presents his ideas in well written articles. However, I found nothing in his article that refuted what I had written about how the tax cuts work.

As to your other comment, Ralph, about never encountering a worker at General Motors who turned down overtime "because it put them into a higher tax bracket". I also have never encountered a person who turned down overtime "because it put them into a higher tax bracket". However, as a supervisor in the 1970s, I did encounter many employees who either turned down overtime or only


Ralph Deeds profile image

Ralph Deeds 9 years ago

By the way, I spent 34 years dealing with auto workers, and I never heard of a single instance where someone declined overtime because "it would put him in a higher tax bracket." That is an apochryphal statement in my opinion. I would be interested in the basis, if any, for it.

In reply to a Walter Reuther speech across the bargaining table urging GM to schedule less overtime and hire more workers, GM vice president Earl Bramblett responded "Overtime is an evil of which everybody wants their fair share." He was referring to the elaborate rules in the national and local collective bargaining agreements for equalizing overtime among workers doing similar work. We did have resistance to overtime during peak years of production when assembly plants were scheduled six days a week, 10 hours a day for extended periods. But the resistance had nothing to do with income tax brackets.



Ralph Deeds profile image

Ralph Deeds 9 years ago

Your comments could hardly be more misleading and erroneous. The Bush administration has run up enormous deficits which our grandchildren will be paying far into the future. Moreover, the richest Americans have been the primary beneficiaries of the Bush administration's ill-advised tax cuts. Here's a link to an article with an opposing view. Krugman on Bush tax cuts.


livelonger profile image

livelonger 9 years ago from San Francisco

Yes, but tax cuts in the face of irresponsibly high spending stunts future economic growth. The GOP has been on a spending spree for years.

    Sign in or sign up and post using a HubPages Network account.

    0 of 8192 characters used
    Post Comment

    No HTML is allowed in comments, but URLs will be hyperlinked. Comments are not for promoting your articles or other sites.


    Photo Credits

    The three photos appearing in this Hub are from the Library of Congress online's Digital Arts collection. All three were taken by Federal Government employees in the course of thier work and, as such they are in the public domain and available for use by the taxpaying public who paid for them with our tax dollars (NOTE: the collection contains thousands of photos which can be viewed online but use may be limited as not all photos in the collection were taken by government employees and many of these have copyright restrictions on them).

    Photo 1 -Soldier doing Taxes photo catalog information:

    TITLE: Camp Lee, Virginia. Even as you and I, the soldier at this time of year may be found, whenever there is time , scratching his head over the complexities of his income tax return. Private Jack Lewis is deep in the annual problem

    CALL NUMBER: LC-USW33- 016782-C [P&P]

    REPRODUCTION NUMBER: LC-USW33-016782-C (b&w film neg.)

    MEDIUM: 1 negative : safety ; 4 x 5 inches or smaller.

    CREATED/PUBLISHED: 1943?

    NOTES:

    Title and other information from file print.

    Image source: U.S. Army.

    Transfer; United States. Office of War Information. Overseas Picture Division. Washington Division; 1944.

    Film copy on SIS roll 0, frame 0.

    Photo 2 - New Mexico Farmer & Wife Doing Income Taxes:

    TITLE: Moreno Valley, Colfax County, New Mexico. William Heck, a cattleman, and his wife making out their income tax form

    CALL NUMBER: LC-USW3- 018954-E [P&P]

    REPRODUCTION NUMBER: LC-USW3-018954-E (b&w film nitrate neg.)

    MEDIUM: 1 negative : nitrate ; 2 1/4 x 2 1/4 inches or smaller.

    CREATED/PUBLISHED: 1943 Feb.

    CREATOR:

    Collier, John, 1913- photographer.

    NOTES:

    Title and other information from caption card.

    LOT 0863 (Location of corresponding print.)

    Transfer; United States. Office of War Information. Overseas Picture Division. Washington Division; 1944.

    Film copy on SIS roll 12, frame 2090.

    SUBJECTS:

    United States--New Mexico--Colfax County--Moreno Valley.

    FORMAT:

    Nitrate negatives.

    PART OF: Farm Security Administration - Office of War Information Photograph Collection (Library of Congress)

    REPOSITORY: Library of Congress Prints and Photographs Division Washington, D.C. 20540

    DIGITAL ID: (digital file from intermediary roll film) fsa 8d26159 http://hdl.loc.gov/loc.pnp/fsa.8d26159

    OTHER NUMBER: H 5486

    CONTROL #: owi2001020625/PP

    Photo 3 - Social Security promotion photo of family at dinner:TITLE: Old-age and Survivors Insurance Under the Social Security Act. Every man wants security and happiness for his family. Wage earners covered by the Federal Old-age and Survivors Insurance System can look forward []

    CALL NUMBER: LC-USE62- D-OA-000055 [P&P]

    REPRODUCTION NUMBER: LC-DIG-fsa-8e09021 (digital file from original neg.) LC-USE62-D-OA-000055 (b&w film neg.)

    MEDIUM: 1 negative : safety ; 5 x 7 inches or smaller.

    CREATED/PUBLISHED: [between 1940 and 1946]

    RELATED NAMES:

    United States. Office for Emergency Management.

    NOTES:

    Title and other information from caption on negative; caption is incomplete

    Negative copied from print in lot.

    Image source: Federal Security Agency; 2533.

    Actual size of negative is C (approximately 4 x 5 inches).

    Transfer; United States. Office of War Information. Overseas Picture Division. Washington Division; 1944.

    Film copy on SIS roll 0, frame 0.

    SUBJECTS:

    United States.

    FORMAT:

    Safety film negatives.

    PART OF: Farm Security Administration - Office of War Information Photograph Collection (Library of Congress)

    REPOSITORY: Library of Congress Prints & Photographs Division Washington, DC 20540

    DIGITAL ID: ((digital file from original neg.)) fsa 8e09021 http://hdl.loc.gov/loc.pnp/fsa.8e09021 (intermediary roll film) fsa 8b00000 http://hdl.loc.gov/loc.pnp/fsa.8b00000

    CONTROL #: oem2002010950/PP

    More by this Author


    Click to Rate This Article
    working